By Henny Sender and Sundeep Tucker in Hong Kong and Jamil Anderlini in Beijing Source: Financial Times   November 15 2007 International private equity funds facing ever more intense competition for deals in China are considering a new tactic – raising local currency renminbi funds, possibly in partnership with pools of local capital.

Among those examining the prospect, albeit in a preliminary way, are Carlyle Group, TPG and investment firms in Singapore and Hong Kong, bankers say.

China does not yet have the legal framework to allow a viable onshore structure so all international funds and even most Chinese-owned and operated funds are set up using an offshore investment vehicle and foreign currency.

But the government has repeatedly said it wants to encourage a vibrant domestic private equity industry and laws and regulations are being prepared to encourage renminbi-denominated funds and even allow Sino-foreign joint ventures.

The global credit crisis has increased the cost of capital for private equity deals in developed markets and helped renew international funds’ interest in China.

“The ongoing crisis in developed markets has shifted the focus to China and it is very easy for funds to raise money for China-specific investments,” says Danny Po, head of M&A tax services in China for PWC. “It is a seller’s market right now, with a shortage of good targets and no shortage of funds.”

While international funds previously competed mostly with each other, they will soon have to go up against a slew of domestic funds that are raising money from the bulging coffers of local investors.

“These domestic private equity firms will be huge competition for the foreign firms,” says Jack Lange, a long-time partner in the Hong Kong office of Paul, Weiss, Rifkind, Wharton & Garrison. “They will have better contacts both in business and government . . . it makes more sense to team up than compete head to head.”

There are, potentially, considerable advantages to establishing these new funds. Private equity executives studying the idea say they expect local currency funds to encounter fewer regulatory barriers to close deals and that the approval process will be swifter.

In addition, one of the challenges cited in a speech in Hong Kong yesterday by David Rubenstein, co-founder of Carlyle Group, is that of finding new investors to fund the industry.

Local renminbi funds can tap the burgeoning investor base in China, which would help to give foreign firms a local face.

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